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Abstract

Around the world, the longer life expectancy of the population raises important questions for policy-makers about how citizens can maintain their basic standard of living after retirement. Pension schemes tend to be the major source of retirement incomes, at least, in the developed world. Facing this aging problem, the Taiwanese government offered persons insured under the Labor Insurance Pension Scheme the choice of whether or not to annuitize their retirement benefits from January 1, 2009. Following the implementation of this pension program, the insured may now select the old-age one-time benefit or a monthly pension benefit when they retire. The puzzle is that very few people would choose to annuitize their wealth in practice. This is contrary to the suggestions made by the financial literature. In this study, we apply the liquidity premium and the implied longevity yield (ILY) to compare the old-age one-time benefit with the monthly pension benefit. The results demonstrate that the ILY minus the risk-free rate is greater than the liquidity premium in most scenarios and these findings encourage the insured to choose the old-age pension benefit. This result is consistent with the financial literature. Moreover, we find that those insured with the lowest insurance salary and fewer years of coverage earn the highest ILY. This shows that the program has been designed with the purpose of wealth re-distribution.

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